Agency for specialized monitoring (ASM) Audit & Its Importance in Clean Credit Culture

Introduction of ASM in India

Public sector banks (PSBs) have made significant progress with respect to improvement of credit underwriting and monitoring process in the PSB Reforms EASE Agenda. Appointment of Agencies for specialized monitoring (ASM) was one of the major key reforms under EASE 3.0 Agenda “Smart, Tech-enabled banking for aspiring India”. Which emphasizes the Fintech partnerships and analytics-driven risk management as well decision support system in banking.

Due to increase in frauds like Nirav Modi and Vijay Mallya scams, bank’s credibility was at high risk. And, the amount of NPAs are increasing drastically in almost every bank in India. RBI and IBA took the stand and introduced a new reform.

In October 2018, Indian Bank’s Association (IBA) has released a framework for the appointment of ASMs qualified for monitor the technical, financial and legal aspects of project loans above ₹250 crore. ASM stands for agency for Specialized Monitoring. ASM is an external agency which is introduced to monitor large credit exposure advanced by Bank/consortium of banks.

What is ASM Audit

ASM audit involves complete credit assessment of the borrower including assessment of his ability to repay the loan. It also involves monitoring the financial operations of the borrower to track or identify any diversion/misuse of the borrowed fund. For this purpose, ASM team prepares a periodical ASM report and submit it to the lender bank. It allows banks to prevent/minimize money laundering cases, mis utilization of borrowed funds, identification of loan accounts which may convert into NPA.

Monitoring and Reporting processes in ASM

ASM is appointed by Lender bank/Lead bank in case of consortium of banks. ASM has two major responsibilities, one is monitoring and other is reporting to the Lender bank. Bank may appoint two different ASMs for monitoring and reporting purpose.

Under the monitoring process, the borrower is mandated by the bank to take approval from the ASM team before spending the amount sanctioned by the lender bank. Borrower has to send the request for the approval of payments before ASM. ASM will approve the payment request of the borrower if the conditions laid down by the lender are fulfilled.

Following procedures to be performed, to check the genuineness of the payment request.

  • Verification of Invoices and relevant Purchase Orders and other supporting documents pertaining to the payment request.
  • To ensure the genuineness of the vendor and purpose of payment.
  • Every payment request should be supported by documents (i.e., without any supporting document no payment request to be approved).
  • To check Performa Invoices for advance payments made to vendors.
  • Be aware of the duplicity of payments (i.e., same payment should not be approved twice).
  • Every payment should be pertaining only to the specified purpose as per the sanction terms.
  • Any suspicious payment is to be checked carefully.

The above procedures are to be performed for every payment which is to be made out of the monitored credit facility. Bank may set the minimum amount of payment for which approval of ASM team is not required. This process is followed by ASM team and Borrower on regular basis, which reduces the risk of mis-utilization of funds and it enables banks to make ground level surveillance on the financial activities of the borrower.

Under the reporting process, ASM team prepares a quarterly ASM report in the form of questioner during the period covered under the engagement terms with the lender bank. The broad scope of ASM report is specified by the IBA as follows which may be extended by the lender bank as per industry specific requirements of the borrower. –

  • Verification of debt profile of the borrower (Overall Credit exposure, Outstanding balances and collateral securities).
  • Analysis of Drawing Power (DP), adherence to sanction terms and adequacy of DP.
  • Assessment of quarterly financial info. and Cash Flow state. and observations thereon.
  • Additional verification evidences of end use of funds and its utilization as per conditions laid down in sanction letter.
  • Monitoring of diversion/Mis-appropriation of Funds and observations thereon.
  • Check whether insurance, charges, security margin created on current assets.
  • Observation on non-moving/slow-moving/Built-up of inventories.
  • Aging of Inventories, Debtors and other current assets.
  • Monitoring of Sale and Purchase, whether sale proceeds and payments to vendors, routed through designated bank account, comparison of actual vis-à-vis projected figures, verification of sample Invoices.
  • Review of unbilled revenue and WIP and justifiable reasons for the same
  • Review of actual progress of the project vis-a-vis scheduled milestones
  • Verification of project expenses, payments to creditors and advances to suppliers.
  • Analysis of transactions, operations, and financial health of the borrower.
  • Analysis of audit report/independent Engineer’s report/insurance/reports submitted to Banks/government.
  • Verification of group company transactions, Litigations/Contingent Liabilities, high value transactions, High value transactions.
  • Analysis of External Credit Ratings, statutory and regulatory compliances.
  • Assessment of Key Financial Indicators/Movement in stock exchanges.
  • Adequacy of data provided by the borrower for ASM report.
  • Physical verification of Site/Plant/Current assets/inventories by ASM team and observations thereon.

As per the report of press information bureau, after deployment of agencies for Specialized Monitoring and proactively monitoring, slippage into NPA has reduced from 3.90 lakh crore in year ending March 2018 to 1.88 lakh crore in year ending December 2019 and the amount of NPAs has been reduced as compared to previous years.

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